ESG Integration through T. Rowe Price Associates RIIM framework

Our corporate RIIM framework systematically builds a distinct ESG profile for approximately 15,000 companies and corporate issuers globally. The model processes raw data from a variety of internal and external sources including T. Rowe Price systems, company reports, and select third party vendors, such as Sustainalytics.

The raw data is carefully selected based on its relevance and quality. Not all indicators are created equal; for example, preparedness indicators such as policies and certifications have a lower weighting in RIIM than higher quality indicators such as company-reported performance metrics, as we consider them less insightful datapoints for understanding a company’s ESG profile.

RIIM groups the data inputs into topics under three distinct pillars: Environment, Social and Governance. Each pillar has several sub-pillars, which are further sub-divided into a total of 23 categories.

The weighting, or relative importance, that we assign to each ESG factor is determined at the sub-industry level to ensure that we focus on those most likely to have a material impact on the performance of each security. For example, when evaluating the ESG profile of an energy company, RIIM would assign greater weight to certain categories under the ‘environment’ pillar, as environmental factors are most material to its investment thesis. For a software company social factors are likely to be more relevant.

RIIM assigns each category a score which contributes to the overall rating for the issuer.

RIIM’s output is displayed using a simple ‘traffic light’ system:

• Green corresponds to scores of less than 0.5, representing positive ESG characteristics, or low ESG risks.
• Orange corresponds to scores of 0.5 and above, but below 0.75, representing moderate ESG risks.
• Red corresponds to scores of between 0.75 and 1, representing high ESG risks.

It is important to note that the overall rating for a particular issuer is based on the worst of the pillar ratings. So, for example, a company that is rated green for Environment and Governance but Orange for Social would have an overall Orange rating.

Rather than viewing RIIM ratings as scores, it can be more helpful to think of them as a visual way of highlighting the extent of a security’s ESG risks or positive ESG characteristics.

We consider the RIIM ratings of individual securities to be proprietary information.

Quantitative RIIM scores are just the starting point in the ESG evaluation process, but they are important as they help to quickly identify any outliers, both positive and negative, that require more in-depth fundamental analysis. They also help to inform our engagement program.

T. Rowe Price is defined as T. Rowe Price Associates, Inc.

Important Information

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of April 2024 and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.

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© 2024 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/ or apart, trademarks of T. Rowe Price Group, Inc.

202405-3609509

The corporate RIIM framework supports ESG integration by providing a common language for our analysts and portfolio managers to compare the ESG profiles of companies.

RIIM supports each stage of our three step ESG integration process: Identification, Analysis and Integration.

In the first step, identification, RIIM processes data inputs selected based on their materiality and categorizes them, resulting in a weighted category score. These category scores are aggregated in sub-pillars under the three main Environment, Social and Governance pillars, resulting in a green, orange or red rating for each pillar. The overall RIIM indicator score for a particular security is the worst of the three pillars, based on the philosophy that scoring well in one pillar does not mitigate the risk in another pillar.  For example, favourable social characteristics do not make up for a poor environmental profile.

These quantitative RIIM scores help identify securities which may require further ‘deep dive’ fundamental analysis, by flagging any elevated ESG risks (red), moderate ESG risks (orange) or positive ESG characteristics (green).

During the next step, analysis, securities flagged in RIIM may undergo fundamental analysis by the Responsible Investing team.  This analysis may be conducted solely by the RI team, but often the research analyst covering the security is also involved. This analysis helps identify where we should prioritize engagement and informs proxy voting recommendations where applicable.

Our process for determining which securities receive a fundamental overlay is driven by:

• The RI team; as a result of anomalies in the scoring, or as part of a broader piece of work;
• An equity or credit analyst requesting further analysis;
• The portfolio reviews the RI team conducts with PMs, which tend to focus on issuers that are orange or red in RIIM.

The third step is integration. All analysts and portfolio managers have desktop access to RIIM output and the fundamental ESG research notes, enabling them to easily incorporate ESG factors into any stages of the investment process as appropriate to their mandate.

Within estimate and valuation data, analysts and portfolio managers can also see RIIM ratings.  For each name in the list, they can choose to click on either the engagement note or the ESG research note.  In addition, on the right-hand side, they can navigate to the ESG score section and view the overall RIIM score of the company.

T. Rowe Price is defined as T. Rowe Price Associates, Inc.

Important Information

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of April 2024 and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. 

Australia - Issued by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 28, Governor Phillip Tower, 1 Farrer Place, Sydney NSW 2000, Australia.

© 2024 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/ or apart, trademarks of T. Rowe Price Group, Inc.

202405-3609509

Our RIIM framework for equities and corporate bonds scores thousands of companies representative of our investable universe on a variety of ESG criteria to build a distinct ESG profile for each. 

RIIM currently processes hundreds of raw data inputs from a variety of sources, including T. Rowe Price databases, company reports and select third party vendors such as Sustainalytics. Please note we do not use third party ESG ratings within our RIIM framework. The data inputs largely comprise non-financial datapoints, for example, health and safety management or deforestation programs, and incident history, for example, climate-related controversies or workplace accidents. These data are not traditionally used in financial analysis and they help build a more comprehensive overall profile of a company.

We carefully select data inputs, taking a ‘best of breed” approach to third party data providers. We may switch from one provider to another to ensure we are using the best available data for each ESG category we score.  Where none exists, we develop our own. For example, we created our own net zero datasets as we believe that third party net zero data is not comprehensive enough. RIIM is designed to evolve as data availability improves, enabling us to easily swap out less useful datasets in favour of higher quality or more relevant indicators.

To recap, ESG integration refers to the systematic and explicit inclusion of material environmental, social and governance factors into investment analysis and investment decisions. ESG considerations form part of our overall investment decision making process alongside other factors, to identify investment opportunities and manage investment risk. As such, we developed RIIM to focus on the ESG factors that are most relevant to a company or corporate issuer’s financial performance, in other words, those that are most material. We believe that financial materiality varies across sectors, and we have built the RIIM framework to reflect this. For example, environmental factors are likely to be more financially material to an oil and gas producer than to a bank.

We group RIIM’s data inputs under three distinct pillars: Environment, Social and Governance. Each pillar has several sub-pillars which are further sub-divided into categories. Not all subcategories will be material to a particular company or corporate issuer.  Because of a lack of disclosure in some areas, rather than scoring each individual datapoint, RIIM aggregates similar data by category and assigns each category a weighted average score.

The weight we attribute to the score of each category in RIIM depends on the sub-industry of the company under consideration, so is more granular than the industry standard, enabling us to conduct more detailed analysis. Our Responsible Investing analysts map materiality weightings for 163 different sub-industries to each category in RIIM.

A key feature of RIIM is the ability of the RI team to proactively fill missing data or override stale datapoints, such as the score given to a particular ESG factor or the weight allocated to it, based on insights gained during fundamental analysis and engagements. 

The weighted average score for each category contributes to the overall rating for the company or issuer and is displayed in RIIM’s output using a simple ‘traffic light’ system:

• Green corresponds to scores of 0 to 0.49, representing positive ESG characteristics, or low ESG risks.
• Orange corresponds to scores of 0.5  to 0.74 representing moderate ESG risks.
• Red corresponds to scores of 0.75 and above representing high ESG risks.

While RIIM’s coverage is very comprehensive, it does not cover every company within our equity and fixed income portfolios. For these uncovered issuers, our RI team screens for environmental, social and governance controversies using a third-party provider (RepRisk), which is an Artificial Intelligence (AI) tool that scans news articles and non-governmental organization (NGO) reports for environmental and social issues tied to specific companies. As RepRisk has coverage of approximately 90,000 companies, we are able to gain an understanding of most company track records in terms of any ESG incidents or controversies and, where enough corporate disclosure is available, the RI team conducts a fundamental evaluation of a company’s environmental, social and governance profile to create a RIIM score.

RIIM retains all historical data and indicates the change in an issuer’s scores over a 12-month period, as well as enabling us to compare an issuer’s ESG profile over any two time periods. 

T. Rowe Price is defined as T. Rowe Price Associates, Inc.

Important Information

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of April 2024 and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. 

Australia - Issued by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 28, Governor Phillip Tower, 1 Farrer Place, Sydney NSW 2000, Australia.

© 2024 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/ or apart, trademarks of T. Rowe Price Group, Inc.

202405-3609509